Quick Thoughts – ADM Q1 Results

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ADM reported Q1 ’14 results that were well shy of consensus this morning ($0.55 per share, adjusted, versus expectations of $0.74 per share).  While a less impactful number, revenues missed consensus estimates as well.

While we like ADM’s long-term positioning within the global agricultural complex (see our initiation piece on the subject here) we have expressed some more near-term concerns with the name, starting with valuation (Exhibit 1).

The challenges in the quarter were related to weather and logistics (this is a valid weather excuse, in our view) and the company’s merchandise and handling EBIT (-$17 million variance year over year) should improve next quarter.  Oilseeds processing (soybean crushing, largely) was solid with modest improvements year over year and we expect trends to remain healthy in that segment based upon strong domestic and global demand trends (part of our long-term thesis).

Having said that, the company’s bioproducts segment (corn based ethanol) carried the day for the company in Q1, with year over year EBIT gains of $77 million (Exhibit 2).

  • This is the segment that is cause for some near-term concern, if our positive bias on corn prices prove out;
  • In fact, cash ethanol margins (ADM does actively hedge, of course) have declined significantly in recent weeks to start the company’s Q2;
  • We expect that corn prices will continue to pressure margins in this segment, making it difficult for the company to deliver the type of year over year EBIT growth that we saw in Q1 and that substantially buoyed EPS in the face of weakness across other segments;

While we continue to appreciate ADM’s relatively unique positioning within the global agricultural complex and the progress the company has made toward improving its business mix and return on invested capital profile, our near-term concerns coupled with a less than compelling valuation force us to be spectators at this point.

See our published research for the full report and exhibits.

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